Greetings, and welcome to the FLEETCOR Technologies Incorporated Second Quarter 2018 Earnings Conference Call. As a reminder, this conference is being recorded. I would like to turn the conference over to our host, Mr. Jim Eglsetter, Head of Investor Relations for FLEETCOR Technologies. Thank you, sir.
You may begin.
Good afternoon, everyone, and thank you for joining us today. By now, you should have access to our Q2 press release and supplemental presentation, which can be found on our website at www.fleetcor.com under the Investor Relations section. Throughout this conference call, we will be presenting non GAAP financial information, including adjusted revenues, adjusted net income and adjusted net income per diluted share. This information is not calculated in accordance with GAAP and may be calculated differently than other companies' non GAAP information. Quantitative reconciliations of historical non GAAP information to the most directly comparable GAAP information appears in today's press release and on our website as previously described.
Also, we are providing updated 2018 guidance on both the GAAP and non GAAP basis along with reconciliations. Finally, before we begin our formal remarks, I need to remind everyone that part of our discussion today will include forward looking statements. This includes forward looking statements about our 2018 guidance, new products and fee initiatives, expectations regarding business developments and acquisitions and statements regarding the unauthorized access to the company's systems, including assumptions with respect to the investigation of the incident to date. They are not guarantees of future performance, and therefore, you should not put undue reliance upon them. These results are subject to numerous risks and uncertainties, which could cause actual results to differ materially from what we expect.
Some of those risks are mentioned in today's press release on Form 8 ks and on our annual report on Form 10 ks filed with the Securities and Exchange Commission. These documents are available on our website and at www.sec.gov. With that out of the way, I would like to turn the call over to Ron Clark, our Chairman and CEO. Ron?
Okay, Jim, thanks, and thanks everyone for joining the call today. Upfront here, I'll plan to cover 2 subjects. So first, I'll provide my perspective on the quarter along with some updated guidance for 2018. And second, I'll talk about the progress that we're making in positioning FLEETCOR for the long term. Okay.
So on to the quarter, our Q2 results were quite good. We outperformed our internal expectations in both revenue and earnings, reporting Q2 revenue of 5 $85,000,000 up 15%. That's if you adjust 2017 for ASC 606. Our Q2 cash EPS was $2.57 up 29%. So 15% top line, 29% bottom line.
So the last three quarters of cash EPS profit growth have been 28%, 28% and now 29%. So not bad. The macro, not particularly helpful this quarter versus our expectations. So although we enjoyed pretty good fuel prices in the quarter, FX worsened considerably, spreads narrowed a bit, interest rates rose and even our effective tax rate came in a bit worse than planned. So in total, these macro factors resulted in approximately $10,000,000 of negative revenue impact and about $0.05 of negative cash EPS impact in the quarter versus our guidance.
So the macro hurting our results a bit. Let me turn to organic revenue growth in the quarter, which penciled out at 9% in aggregate and just run through that. So, 1st, fuel card, organic growth improved to 5% from 1% in Q1. International fuel card growth was 8%, Inside of that Russia grew 29%. Here in North America, our trucking fuel business grew 20%.
Card log business way up. So lots of good fuel card performances. Unfortunately, the offset remains our U. S. Local and partner business still impacted negatively by last year's GFN conversion and the weakening Chevron portfolio.
Corporate Payments, very good quarter, up 20%. Inside of that, the construction vertical, up 30%. Our core virtual card business, our direct business up 24%, the payroll card business there way, way up, Cambridge posted mid teens growth. So really very solid corporate payments. Toll, 20% in Q2.
That was driven 5% by higher average tags or volume along with higher prices for our higher usage customers. The trucker strike did depress transactions and spend about 5% in the quarter, but had very little impact on Q2 toll revenue because of the subscription basis there. The new toll sales in the quarter are good, up 16% over last year. Lodging rocked in the quarter, driven by SMB room volume, which was up over 30%. That was helped by our digital booking tool.
The large hotel segment remained healthy, the same store there plus 3 and the hotel tuck in from last summer grew terrific, up over 30%. So, lodging, firing on all cylinders. Our gift card business, not so good, posted a 19% decline in the quarter. Fortunately, the core transaction volume and processing revenue, which are ratable, did come in on plan and flat with the prior year. So all of the decline, all the softness, was attributable to some big card orders that got pushed into Q3.
So our view is, the decline is really just a timing issue and that SVS for the full year of 2018 should be basically flat with full year 2017. In terms of trends in the quarter, quite positive. New sales, new business up 14% versus the prior year. And inside of that more new fuel card sales than ever before. So a record level of fuel card sales.
Same store customer growth positive at +2. Customer tension, again above 90%. That makes 13 consecutive quarters of 90% plus. We did repurchase about $300,000,000 of FLT stock in the quarter. That brings our repurchases since 2016 to about $1,000,000,000 Our Board increased our buyback authorization in our last meeting by another 500,000,000 dollars We're also really delighted to be named to the S and P 500 Index.
It feels good to be recognized for a lot of hard work and consistent performance over a long period of time. So look, the story of the quarter, good revenue and profit growth, improving fuel card organic growth and really good trends, good sales and good retention. Okay. Let me transition over to our rest of year guidance. So today, we're raising our full year 2018 cash EPS guidance at the midpoint by $0.07 to $10.42 So the $10.42 updated full year guidance would result in 22% profit growth for full year 2018.
Important to note that this updated guidance assumes quite a bit weaker macro environment in the second half than we had thought, say 90 days ago. We're now estimating approximately $30,000,000 to $40,000,000 of negative revenue impact rest of the year, driven predominantly by the worsening FX, a bit more unfavorable interest rates, both of which will more than offset the favorable fuel price. Despite the weaker macro, the fundamental performance should be pretty sound though, rest of the year. In the 8% to 10% range in Q3 and Q4, and likely a 9% full year 2018 organic growth number. We do expect the fuel card organic growth to accelerate to about 8% by Q4.
And our non fuel lines of business to likely moderate into the mid teens rest of the year as they lap some second half pricing and absorb some big contract renewals. Okay. Let me shift gears and talk a bit about the positioning of FLEETCOR for really long term sustainable growth. So a few areas. So first up is the portfolio or the sandbox in which we play.
So as most of you know, we started out as a pure fuel car provider and now look more like a diversified business payments company. So initially fuel cards and now really a whole line of specialized business expense cards and networks. So in addition to fuel, toll, parking, hotel, food, payroll, even commuter cards, So a variety of spend categories. And then second, we've entered the corporate payments or general payables space with digital offerings to automate AP and even pay international AP. So this creates certainly a bigger sandbox that has a larger market potential and gives the company a much, much longer runway.
We're obviously doing well in the new diversified areas, the newer categories. Our 3 non fuel lines of business growing over 20% year to date. We still got more portfolio work to do. We hope to extend the geographies in which we play, specifically Intercontinental Europe and Asia. And we do continue to explore a new idea for SVS that could help accelerate the company's overall growth.
So look, lots of progress in structuring a bigger, broader and more diverse company. 2nd area of progress
is in
building a global sales machine. So we think sales is the single most important asset for a company like ours. And we've built a pretty big machine. We're now selling 100 of 1,000,000 of dollars of new field reps, telesales reps, field reps, telesales reps, digital channels, 3rd party retailers, and through a host of partners. We're also spending about $200,000,000 in sales investment this year and getting pretty good productivity, pretty good efficiency from that.
We've rotated sales pretty hard to digital. In Q2, approximately 40 percent of all our global card new sales were from the digital channel. So that is up substantially. We're making new investments this year in sales enablement. Those are ways to soften the beach to make selling easier.
We're also investing in a new channel sales group that will explore sales opportunities with new partners, including merchant acquirers, insurers and even travel management companies. So look, we've developed a pretty impressive sales asset and we're continuing to build it out. And then lastly, we're making pretty good progress, on the new product front and customer experience front and have initiatives going on really in virtually every line of business. So on fuel, we've talked about our Beyond Fuel programs in our local and trucking business. Those take the form of our Build A Pro Construction program and in trucking our on road card.
Both of those offerings are gaining traction now and they literally double the revenue from a customer. So quite exciting. We're launching what we call an AP or accounts payable companion card that's designed to capture just the general AP spend that our fuel card clients would have. So early take rates on that companion card are good. I mentioned before, we've implemented a new simple fuel card UI for about 100,000 of our customers here and in the U.
K. In Brazil, we've launched Fuel First. That's our program to take the toll technology and repurpose it for refueling and parking and to target non toll users, which is a really big unserved segment for So we're in the process of building out the fuel acceptance network. So we've got 500 Shell stations and now we're starting to build out the Petrobras accepting locations. We're working on a plan to double our parking lot acceptance, and we're even testing fast food payments.
So the idea is to have extended networks toll and target non toll users, so a big opportunity. In hotel, the digital booking tool that we've rolled out is now responsible for a third of all of our SMB hotel rooms booked, growing every quarter. In corporate pay, we did launch officially our ASAP, fully automated payable service for small business. So a complete AP outsourcing solution every bill that the company has. And so all of these product initiatives expand again the market potential and allow us to serve unserved customer segments.
So look, in closing, yes, we're still a fuel card company at our core, about 45% of our consolidated revenue, but we're expanding the line of specialized business expense cards and networks, clearly beyond fuel. We're building a pretty big global selling machine and we're introducing a host of new products to open up customer segments. We're also still pretty good at acquisitions, finding them, buying them and improving them. So all of these activities are aimed at building a bigger, better, stronger and more sustainable company as we go. So we think that bodes well.
All right. So with that, let me turn the call back over to Eric to pick up on the quarter. Eric?
Thanks. Before I get started on the numbers, I want to remind everyone that the company has adopted the new revenue recognition standard ASC Topic 606 via the modified retrospective method of adoption effective January 1, 2018. Under this method, 2017 results are not restated. In my revenue discussion to follow, as I did last quarter, I will talk about revenue in 2 ways. 1st, using the new GAAP convention which compares 2018 using the new ASC 606 standard to 20 17 using the prior standard.
And then I will discuss revenue for 20182017 as of ASC 606 was never adopted, so you can compare revenues the way we have historically presented it. Now onto the quarter. For the Q2 of 2018 on a GAAP basis under the ASC 606 standard, we reported revenue of $585,000,000 up 8.1% compared to $541,200,000 in the Q2 of 2017. As a reminder, merchant commissions and certain third party processing expenses are now netted against revenue, which resulted in a reduction in revenue of approximately $23,000,000 in the Q2 of 2018 versus the prior standard. For the Q2 of 2018, GAAP net income increased 35 percent to $176,900,000 or $1.91 per diluted share from $131,000,000 or $1.39 per diluted share in the Q2 of 2017.
Non GAAP financial metrics that we will be discussing are revenues excluding the impact of the new ASC 606 standard to provide comparable revenue amounts between periods and adjusted net income, which we sometimes also refer to as cash net income or cash EPS. A reconciliation of GAAP revenue using the new ASC 606 standard to the prior revenue convention is provided in Exhibit 7 of our press release. And adjusted net income to GAAP numbers is provided in Exhibit 1 of our press release. Revenues in the Q2 of 2018 excluding the impact of ASC 606 were $608,300,000 up 12.4% compared to $541,200,000 in the Q2 of 2017. Adjusted net income for the Q2 of 2018 increased 27.1% to $237,800,000 compared to $187,000,000 and adjusted net income per diluted share increased 29.2 percent to $2.57 compared to $1.99 in adjusted net income per diluted share in the Q2 of 2017.
2nd quarter results reflect the impact of a mixed macroeconomic environment compared with the Q2 of 2017. Movements in foreign exchange rates were primarily negative, particularly towards the end of the quarter. We believe it negatively impacted revenue during the quarter by approximately $6,000,000 Fuel prices were mostly favorable during the quarter and although we cannot precisely calculate the impact of these changes, we believe positively impacted revenues by approximately $13,000,000 And finally, fuel spreads had about a $7,000,000 negative impact in the quarter. So in total, those changes were approximately neutral to our Q2 revenue compared with the Q2 of 2017. Relative to our prior guidance, the macro negatively impacted our revenues by approximately $10,000,000 in the quarter, driven primarily by unfavorable movements in foreign exchange rates, mostly in Brazil during the latter part of the second quarter.
We delivered another quarter of solid organic growth, up 9% overall. Most of our major product categories performed well during the quarter. Our fuel card business rebounded to 5% growth and would have been approximately 8% if not for the negative impact of the conversion issue for a portion of the Mastercard portfolio in 2017 and Chevron in the quarter. As expected, we started lapping the conversion issue at the end of the Q2 of 2018 and are well on our way to the normal range of upper single digit growth by the end of the year. The corporate payments category continues to perform well and was up 21% organically during the quarter.
The growth in corporate payments was driven by both our Comdata and Cambridge businesses, which continue to produce very good results. Our toll business was up 20% organically due primarily to a number of growth initiatives implemented throughout 20172018 at STP. Our lodging business was up 27%, driven primarily by an increase in room nights and continued FEMA rooms due to the impact from hurricanes. The FEMA impact contributed about 4% of the growth. And finally, our gift business was down approximately 19% organically in the quarter due primarily to the timing of card orders.
In the Q2 of 2017, we received a number of card orders which we expect to receive in the Q3 of 2018. So in summary, another very good quarter for our non fuel businesses. I would remind you that organic revenue growth has been calculated assuming that ASC 606 was implemented in January of 2017 order to calculate organic growth using a consistent revenue standard in both periods. Now moving down the income statement. Total operating expenses for the Q2 were $320,200,000 compared to $325,200,000 in the Q2 of 2017.
Included in the Q2 of 2018 was the impact of ASC 606, which netted approximately $23,000,000 of merchant commission and certain processing expenses against revenue. Excluding this impact, operating expenses would have been up approximately 5.6%. The increase was primarily due to acquisitions completed in the second half of twenty seventeen. Additionally, we incurred $1,700,000 of expenses in conjunction with the previously announced unauthorized access. As a percentage of total revenues, operating expenses were approximately 54 0.7% compared to 60.1% in the Q2 of 2017.
Again, excluding ASC 606, operating expenses as a percentage of total revenue would have been 56.6% in the Q2 of 2018. Credit losses were $14,500,000 for the 2nd quarter or 6 basis points compared to $14,700,000 or 9 basis points in the Q2 of 2017. Depreciation and amortization expense increased 6% to $68,600,000 in the Q2 of 2018 from $64,700,000 in the Q2 of 2017. The increase was primarily due to acquisitions completed in 2017. Interest expense increased 39% to $33,200,000 compared to $23,900,000 in the Q2 of 2017.
The increase in interest expense was due primarily to the impact of increases in LIBOR and additional borrowing for the Cambridge acquisition and share buybacks. Our effective tax rate for the Q2 of 2018 was 23.5% compared to 31.2% for the Q2 of 2017. The reduction in the tax rate was primarily due to the effect of U. S. Tax reform, which went into effect on January 1, 2018.
As a result of U. S. Tax reform, the federal statutory income tax rate was reduced from 35% to 21%. The reduction in our effective tax rate due to the change in the federal statutory rate was partially offset by higher U. S.
Federal taxes related to the new GILTI tax and higher state income taxes both resulting from U. S. Tax reform. Now turning to the balance sheet, we ended the quarter with $1,185,000,000 in total cash. Approximately $266,000,000 is restricted and consists primarily of customer deposits.
As of June 30, 2018, we had $3,778,000,000 outstanding on our term loans and revolver and approximately $444,000,000 of undrawn availability. We also had $939,000,000 borrowing our securitization facility at the end of the quarter. $292,000,000 dollars The Board has authorized an additional 500,000,000 increase in the share buyback authorization and we now have 629,000,000 in total capacity. As of June 30, 2017, our leverage ratio was 2.34 times EBITDA, which is well below our covenant level of 4 times EBITDA as calculated under a credit agreement. We intend to use our future excess cash flow to temporarily pay down the balance on our revolving credit facility and securitization facility and maintain liquidity for acquisitions and other corporate purposes.
Finally, we are not a capital intensive business, spending approximately $19,400,000 on CapEx during the Q2 of 2018. Now on to the update for the outlook for 2018. We are raising our 2018 guidance to reflect our strong second quarter results compared to our prior outlook, even with the unfavorable macro that we now expect for the remainder of the year. We believe that negative movements in foreign exchange rates, mostly in Brazil during the latter part of the second quarter will more than offset the impact of favorable fuel prices, producing an overall unfavorable impact on second half revenue of approximately $30,000,000 to $40,000,000 which is reflected in our updated full year revenue guidance. The good news is we believe we can offset the unfavorable macro to continued over performance in some businesses, expected lower expenses and the impact from a lower share count in the second half.
Please refer to our 2nd quarter earnings call supplement for additional information regarding our guidance. So with that out of the way, our guidance is as follows. Total revenues including the adoption of ASC 606 to be between $2,365,000,000
$2,415,000,000
dollars net income to be between $720,000,000 $740,000,000 net income per diluted share to be between 7 point $0.75 $7.95 revenue excluding the impact of ASC 606 to be between $2,470,000,000 $2,520,000,000 dollars adjusted net income to be between $960,000,000 $980,000,000 and adjusted net income per diluted share to be between $10.32 $10.52 Some of the assumptions we have made in preparing the guidance include the following. Weighted average fuel prices equal to $2.88 per gallon average in the U. S. For those businesses sensitive in the movement in the retail price of fuel for the balance of the year. Market spreads equal to the 2017 average.
Foreign exchange rates equal to the 7 day average as of July 1, 2018. Interest expense of $135,000,000 fully diluted shares outstanding of approximately 93,000,000 shares, a tax rate of 22% to 24% and no impact related to acquisitions or material new partnership agreements not already disclosed. In terms of guidance for the 3rd 4th quarters, I want to remind everyone that the company's revenue and profits normally build sequentially throughout the year, resulting in higher revenue and profit in the 3rd and 4th quarters. For the Q3, we are expecting adjusted net income per diluted share to be in the range of $2.60 to $2.70 And finally, I want to give you an update on the unauthorized access reported last quarter that primarily involved the company's stored value solutions business. As a reminder, the company took prompt action to investigate and terminate the unauthorized activity.
The company through counsel promptly engaged external experts in information technology forensics to assist in the investigation and the remediation and further enhancement of our systems to prevent future unauthorized access. The company also contacted federal law enforcement and merchants known to be affected. The investigation has now been concluded and we can report that based on the findings of the investigation. We believe the unauthorized access was limited to what was reported earlier. We do not expect the unauthorized access to have a material impact on the company's results of operations.
With that said, operator, we'll open it up for questions.
Thank you. At this time, we will be conducting the question and answer session. We ask that you please limit yourself to one question and one follow-up and then re queue for any additional questions. Our first question is coming from the line of Bob Napoli with William Blair. Please proceed with your question.
Thank you. Good afternoon. Good job on the quarter. The guidance adjustments, where did you outperform fundamentally versus your expectations to enable you to adjust the guidance despite the negative macro?
Yes. Hey, Bob, this is Eric. Effectively, it's a number of things that's driving the second half revenue guidance. 1, obviously, you heard us talk a little bit about the macro. Obviously, it's mostly FX rates in Brazil, which are causing the macro headwind, so about $30,000,000 to $40,000,000 of unfavorable macro.
Partially offsetting that is some over performance, continued over performance in a couple of our businesses, more specifically like our corporate payments and our toll businesses. Some of the businesses that have performed well through the first half, we're going to expect to see those businesses to continue to perform well in the second half. Then in addition to that, we're going to help offset the impact of that by we have lower expenses. If you recall, I mean, because our revenue is being impacted by unfavorable FX rates, our expenses are favorably impact by unfavorable FX rates. So effectively, that's driving our expenses lower in the second half.
So again, some of about half of the unfavorability in revenue from FX, we're going to claw back in expenses in the second half. And then a little bit lower expense spending in some other areas as well. And then finally, we'll have a lower share count in the second half because of the share buyback.
Hey, Bob, it's Ron. Let me just add, it's about $0.15 We're absorbing about $0.15 of macro in the next two quarters.
Okay. Thank you. And just a follow-up question. As we look forward to 20 19 and longer term, what are your thoughts around the organic growth by, I guess, fuel versus non fuel or if you wanted to break it down further by segment, but just thoughts on the organic revenue growth. And if nonfuel was growing faster, would that make it difficult to expand margins, I guess?
Yes. I think if you look at the last couple of years, Bob, we've been kind of high single digits in fuel and obviously better in the non fuel. And so in my comments earlier, I said we expect to moderate, call it, into the mid teens in the 3 non fuel lines. So we haven't started our 2019 plan yet, but I would assume some mix like that going forward. And I think the upsides could be these new add on ideas that we have.
If those get traction and material traction sooner, we could get more lift. And then second, I think if we come up with some solution again to this SVS business, that would be another upside. So pre budget, I'd say high single digits for fuel, teens for the other 3, maybe some acceleration the new programs and then SVS is a wildcard.
Great. Thank you. Appreciate it.
Thank you. The next question is coming from the line of David Togut with Evercore ISI. Please proceed with your question.
Thanks. Good afternoon.
Hey, David.
Pretty major announcement, Ron, calling out a significant expansion plan for Europe and then Asia. Europe, you've got the beachhead with Shell. But I'm wondering, as you look at Continental Europe and Asia, what are the major growth opportunities both organically and then through M and A?
Yes, David, we're kind of
on the same drill of trying to get positions either via partners or acquisitions, right, versus a greenfield build. I'd say the difference in messaging is we put not only more energy in the last 6 to 9 months in Asia, but we're seeing better feedback. So I'm trying to just put in people's minds that we haven't forgotten that part of the world and that something may break our way on that side. So that's I'd say the difference is the Asia activity looks I think a bit more favorable than it did 6 or 9 months ago.
And is that mostly through M and A opportunity or organic growth?
It's not organic. So it'd either be a partner deal or an M and A deal.
Got it. And then Visa seems to be making a bigger push in corporate payments with the announcement with WEX. And I think historically, WEX had been principally Mastercard virtual payments as you had been. I'm just curious, does it make sense for you to bring in Visa just from a negotiating standpoint you work with both of the networks in virtual payments?
Yes. Actually, a good friend
of mine is the CFO of Visa. So it's a relationship that we have. I would say that we're pretty happy with the Mastercard people, with the relationship with the deal. So I'd say never say never. So, we're obviously in conversations with them, but on the same end, pretty happy with Mastercard.
I think last I looked, we're about half of all of Mastercard's U. S. Virtual card business. And I think we're the 2nd largest Mastercard issuer of commercial cards across every product line. So I think they like us because we're relatively important to them on the commercial side.
Got it. Quick final question. On the Mastercard topic, when do you fully lap the Mastercard card conversion from a year ago? And is there a point where it could even become a tailwind as you exit the year?
Yes. Hey, it's Ron again. So I'm actually looking at that slide. So I'd say that it is still it was a negative in Q2 that we reported. It will be a negative in Q3.
And I'm looking at a page that said it will turn positive in Q4. So part of the reason that we're out looking, call it, +8 percent organic in fuel in Q4 is that, that boat anchor is finally making the turn from the minus to the plus column.
Understood. Thank you very much.
Good to talk to you.
Thank you. The next question is coming from the line of Tien tsin Huang with JPMorgan.
I want to so some good nonfuel performance obviously. So on the toll front, how much of the business is tied to volume versus subscription? See that toll transactions were down again, but revenues 20% plus again. So just trying to better model that because we've been getting that question a lot.
Yes, Tien Tsin, it's Ron. So again, the majority, not all, but the majority of the model there is tag based. You pay a fixed amount for a tag for a month. And so what I called out is that our active tags that we bill for grew 5% in Q2 versus the prior Q2. So that's our best metric for volume.
With that said, we do now get, call it, 20% of the revenue base is sensitive to transactions. And to your point, transactions, I think, at the print were down a bit. But the strike, I think, I mentioned had about a 5% negative impact in transaction count. So we think trans would have grown, call it, a couple, 2%, 3% in addition to the tag growth, which is really more selling. And then we obviously picked up incremental revenue from parking and fuel, which obviously is not toll transactions and stuff.
So I'd say, call it half to pick a number out of 20 that call it 5 is tags, a couple is tran and we get some revenue for that and then the increment would be incremental fuel spend and incremental parking revenues. And then the other balance is basically the program we put in place to get paid a bit more money from the high usage, particularly the trucking clients that use the product 80 times a month and put a lot of spend on the program.
Okay. Thanks for that. So it's pretty durable given that mix that you're describing. But how about just to bring it up higher level into Brazil, has your outlook changed FX aside? And I know it's a hard thing to say in Brazil, but FX aside, with what's going on with the election and the macro situation, has your outlook there changed?
And what's your appetite to do more there organically or inorganically?
Yes. I mean, it's a good question. I guess, it's still difficult. I don't have it in front of me, but I think the economy is still 0 to plus 1 or plus 1 for the year. And I think things are a bit frozen, right, with the election in the fall.
But I'd say we're still long on it. I've said it a 1000000 times that when you step way back, it's a big and early days payments market for everything that we do. One of our kind of comps is Eden Red. Half their profits are in that market and not half of ours are. So I'd say that we still like it a lot because of the potential, Tingent, and like others, hope we can get to the other side of this instability.
Okay, that's great. One last one, sorry to take up a third question here. But the SMB room volume, you said, was up over 30, the digital booking tool, which you mentioned last quarter, was going to work. Could that is that just the beginning? Could that actually improve from here?
I'm just curious how sustainable that benefit was? Yes.
I mean, I think the fascinating this is another great question. The fascinating part is we've trained those 10,000 small companies for years now how to use the product, which is to call themselves or walk in. And even that group that's been around a long time, 1 third of them use the booking tool. Of the brand new accounts, for example, that signed up in Q1, 70% of all the SMB rooms were booked with a tool. So the new people that hear it from the get go use it more.
So the first thing is the mix alone will increase it sequentially. And then second, I think as we keep marketing it to the old customer base, we'll get more or less. So my guess is you roll out a year, you'll be at 50% or 60% of all SMB will be booked with that tool.
All right. That's great. Thanks for the update.
Good to talk to you. Thank
you. The next question is coming from the line of Oscar Turner with SunTrust Robinson Humphrey. Please proceed with your question.
Hey, good evening, guys.
Hey, Oscar.
My first question is on Beyond Fuel. When do you think that initiative can be incremental to the segment's revenue growth? And then can you give any color on adoption like what percent of fuel of fuel car customers are eligible to use it and how many of them have used it to date?
Yes, Oscar, it's Ron. I say I wish I could. I'd say that, again, it's still very early days. So if you think about it, we've got, right, 45% of our company is fuel cards and, call it 10 businesses right around the world. And so we're introducing different flavors, different versions of this Beyond Fuel in different places.
So we have different things happening here in our U. S. Local business than we have in our U. S. Trucking business than we have in our U.
K. Business. So the first headline is the approaches for Beyond Fuel are a bit different depending on the specific line of business. But I'd say what the good news is, which I was trying to call out is the early reactions are encouraging. So customers are taking up this AP companion card.
We've got 3 or 4 teams still selling the Build A Pro Construction card. So the problem is we're not long enough into the thing to turn it into a certain model yet. I'd say as we get closer to the end of the year and we build our 2019 plans, ask me again, and we should have a clearer thing. But that would be back to Bob's question earlier, I think that's the delta for people that want to bet. That's the vector for us of the pace of that could drive another point or 2 or 3 of faster growth if that stuff can materialize faster.
Okay. Thanks for that color. And second is just on the long term profit margin outlook. You guys have outlined a number of growth initiatives that you're executing on, some of which require building out sales force or acceptance networks. So how should we think about the ability to maintain your current profit margin levels even as you reinvest towards these growth initiatives?
Yes. We like our chances of those inching up. I think you know us well enough, we're not in the charity press release business. We're in the profitable growth business. So we try to obviously onboard business that we can make money.
And so I'd say the things that would cause us to have higher margins are, A, just the operating leverage. We still have 30%, 40% of the company's cost structure is relatively fixed. So we have that going for us. And then B, these add on things that you brought up earlier carry better margins because many of them are sold back to the same clients. And so obviously, the selling costs and servicing costs of an add on is by its nature lower and thus the add on margins are higher.
So I'd say those two things bode well for higher margins. And then I think just pace of growth and investment goes the other way, right? If we decide to step up sales investment or even more IT or innovation investment. So I'd say if you net those 2, our forecast over the next few years would be to keep ticking it up positive a bit.
Okay. Thank you.
Thank
you. Our next question is coming from the line of Ashish Sabadra with Deutsche Bank. Please proceed with your question.
Thanks. So pretty solid growth in the fuel card business from 1% to 5%, and you're talking about 8% growth for the 4th quarter. If you could just obviously, the headwinds are coming off, but can you also talk about the sales attraction that you've seen here as you've revamped the sales effort on this on the fuel card specifically? And then also in the same light, if you can talk about the KC win, how should we think about it? What really drove that win?
Thanks.
Casey? Yes. Ashish, on the first part of the question, I'd say our confidence in the acceleration is mostly what you said, which is, okay, the print for this quarter was 5 and we're out looking 8. I think David asked a bit ago, asked me about GFN and I said it was a negative impact in Q2 and our plans are for that to turn the other way. So a lot of the acceleration from 5 to 8 is literally just moving that boat anchor aside.
With that said, I hope you didn't miss that we sold more fuel car business globally this past quarter than ever, ever in the history of the company, a record level of it. And so assuming our retention or attrition stays kind of where it is, retention of 90%, obviously, the adding of incremental fuel sales will help lift that thing above 8%. So to us, it's get the boat anchor aside, so the growth is clean B, pick up the sales volume, which we did again in the quarter And then 3rd, Oscar's comment about the Beyond Fuel, get the Beyond Fuel to take. Those are the 3 plans, if you will, to get the thing back to an attractive number. On Casey's, your part 2 question, I think you asked timing or size or both?
Both and also what drove the success like what drove that win?
What are the criteria that Casey was looking for in your product that drove that win?
I got you. So first on the why us, I think all of these partner private label things have a similar screen. They have a, hey, can you do it? Can you operate the thing? So I think there's a few of us that have the systems and the people to actually be able to do it and not goof it up.
So they would look at SLAs of our other partners, reference us that we can do the work. Then 2 is volume or growth that they believe that we can sell. Do we have selling systems that could work? And then 3 is obviously the price. And so I'd say those are the 3 main criteria.
And so I think us versus others that did probably check the box on the first one. Obviously, other people in this space, WEX or Citibank can do cards. And then I think that the view of our ability to grow the volume and whatever our price proposal was would be the 2 things that caused them to pick us. In terms of timing, we're looking at that conversion starting in Q4 and running into the beginning of next year. And although we don't give individual client revenues, I tell you it's a single digit millions annualized contract.
Thank you very much. Thanks for the color.
Thank you. The next question is coming from the line of Sanjay Sakhrani with KBW. Please proceed with your question.
Thanks. Question on the M and A and new partnership front and whether or not you guys are getting closer to anything on those fronts?
Yes, Ron again. So on the M and A front, I think I mentioned in the last call, we actually were on the 5 yard line with something that we decided a no on. So something that was close, we kind of kicked out. But I'm looking at the list in front of me. I'd say that we've got 3 or 4 deals that are active, what I use the term there in the works now.
Looking at them, they're call them $200,000,000 to $400,000,000 ish in size and then there's 1 larger deal. So I'd say that nothing we're going to announce in the next 30 days, but things that were mid and getting later on right now. On the partner front, probably the same. I've got that page in front of me. We've got a couple of things here in the U.
S. We've got something in Europe. We've even got something in Brazil. But again, I've been wrong so many times forecasting the timing of those. I'd say it appears again that we've got 3 or 4 partners that have an interest in maybe doing something, but it's not late enough for me to give you guys a steer that it will be this year.
Got it. And just
a follow-up on, Ron, your response to Tien Tsin's question on STP. When we look at how much of the Brazilian market has your tags, I guess Brazilian vehicles have your tag, what's the penetration rate of those tags into that market and sort of what's the growth opportunity there?
So there's a couple of ways to look at it. We look at the thing in terms of total toll spend, so what's the total take from every toll booth in Brazil annually in real and then how much do we process or collect. And I think that number in front of me, but I think it's around 60% of all the toll money that's collected in a year is collected by us. So I'd say that we're moving down the curve. We sell about 1,000,000 new tags per year.
Again, we've got about 5,000,000 active holders here in Q2. We sell about 1,000,000 new ones per year. So I'd say that we're moving down the curve of lighter users. Obviously, anyone on the toll, on the highways that are going 100 times a month already have our tag. And so we're more likely to get someone that's going 5 times or 3 times next.
So I'd say the big idea, which I don't know if I've communicated it well or not, but the big, big idea there is to take that technology and the relationships we have with fueling and parking and go to the other 35,000,000 vehicles that don't go on the highway, that just go around the cities and like park in the garages and go to Shell stations and Petrobras stations. So when we look at that and the early returns on it are people like not stopping and paying for parking when they go to a mall there and yet the company has only offered that service so far to people that are toll guys that go on the highway. So when we bought the company, our idea was we're not going to be a toll company, we're going to be a toll technology or payment company. And so the message you guys ought to queue on is how fast can we start to add users that are not toll users that want to use fuel and parking in particular. And I'm telling you, if that works, it's 5 to 10 times the market potential of the thing that they build.
And again, we've built a massive distribution system, almost 2,000 people in the field selling. We've turned on their digital. We've got 3rd party retail now. And so we, FleetCor, have relationships with the 3 biggest gas station fueling retailers in the country. And so we bring a fair amount to chasing this thing down.
So that's the growth. That's the growth.
That makes sense. Thank you.
Thank you. The next question is coming from the line of Darrin Peller of Wolfe Research. Please proceed with your question.
Thanks guys. Just first on the second quarter, you can break down again the 5% fuel growth have been excluding the GFN issue in Chevron in the quarter. And just to be clear, wasn't there some element of pent up demand flowing through now or shouldn't there be from the Mastercard product being kind of held off during this process that I would think would show up in swing in Q3? Just you were saying now it will the growth rate would reaccelerate up to 8% plus or I guess should we expect 8% plus in 3rd quarter? Yes.
Hey, Darrin. Yes, if we exclude the impact of the GFN conversion issue and Chevron, the fuel card growth category would have grown around 8% So again, it's in line with the guidance that we previously gave last quarter The growth rates are going to start accelerating in the space. And again, we're going to start exiting at a we're going to clear the GFN issue, particularly as we get to Q4, and we'll have cleaner kind of 8% or so growth rate in that quarter as we exit the year.
Okay.
Yes, Darren. Hey, it's Ron on the Part 2 question of, hey, you got a bunch of you close the retail store, you got a bunch of hot bread lines of people at the door coming in. I'd say again that toe stubbing we did with GFN not only impacted the customers that were on GFN, but hurt the productivity big time of our sales force. We turned them into service reps for,
oh my God, I don't know,
4 or 5 months, yes, 4 to 6 months trying to help clients they had sold when the thing was broken and stuff. And so it's been a way longer recovery of getting that group of people back, A. And then B, because we thought the GFN platform was going to be the platform, a number of the new products we had built only ran on that platform. So I made the decision not to go forward with that and put those new products on that platform, but to put them back on the old platform we had. So that took us another 3 or 4 months to kind of reengineer that.
So I didn't have salespeople selling new things that they didn't have confidence in. And so, it's not really a pent up demand. I really view it as a recovery that finally, we opened a brand new telesales center in Phoenix this past quarter, mostly to get away from that pain that the people couple of 100 people here live through. I wanted a clean Brands Bank and new group of people that hadn't been through it. So I'd say that the way you should think about it is every quarter from now, we need to be building sales volume for that Mastercard product and getting farther away from that problem a year ago.
All right. Thanks. Just a quick follow-up and then I'll leave it at the corporate payments still an area that we're obviously excited about. The sales pipeline continues to be so strong there. I know you have tougher comps on pricing, but I guess I'm just wondering why that business wouldn't go back to even 20% even if it takes a quick breather in the mid teens.
Is that am I thinking about this fair?
Yes, I think you are. And I think we've been with you since we started talking about this that we're huge fans of that category because of the size of it. I think the biggest issue for us, Darren, was the structure of the thing. So when we bought that business initially, whatever size it was, had 2 pretty big parts of its revenue. It had healthcare, which was, I don't know, a third to 40% of the business when we bought it.
And it had a fair amount of partners and resellers in it, call it another quarter or third. So 50% or more of the business was that. Well, those two segments keep going the wrong way even 3 years later. The healthcare business continues to decline even in Q2. So it sits inside of that 20% plus.
Still healthcare was minus, although it's smaller. And second, we keep getting repriced on renewals of the big reseller partners. So even though the volume goes up, we get less money. So what I'd say to you is the non healthcare and non partner business is probably growing 35%, just to pick a number. And so what I'd say is, we are the guy running it and me, we're taking the business away from these two things that I'm saying that were not my favorites to verticals that we like, like construction, media and just general AP.
And so once we kind of ring through the other side of this, the non health care and non reseller piece will be smaller parts and you'll see, to your point, a 20% plus business going forward. How long it's going to take us to get that thing completely ironed out, it will be sometime into next year would be my guess. So it's effectively remaking that business in flight is what we're doing.
Makes sense. Thanks, Ron.
Thank you. The next question is from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.
Good afternoon. Thanks for taking my question. I was wondering if you can maybe kind of address the same store sales trends you've seen. I think you talked about up 2% in the quarter. Can you maybe talk about where you think that's kind of going up, down or sideways as we go forward?
And maybe any puts and takes in terms of industries within that?
Yes, Jim, it's Ron again. I'd say like we always say, we're not super smart in terms of the forecasting of same store and GDP and stuff, but we have seen certainly in the U. S. Now at least 3 or 4 quarters in a row that have been in the plus column. And in this Q2 that just finished, we had super health in lodging, in corporate pace, base and in Russia, those 3 were way up in terms of growth of the existing customer base.
So again, in our plans and the guidance we gave you, we're thinking the things kind of where it's been kind of 1% to 2%, I think is what Eric and I modeled for the rest of the year. But again, it's not a metric that's really super easy to forecast.
Completely understand, but it's helpful color. Thanks. And then maybe as a follow-up, can you maybe just talk about kind of with Cambridge and almost a year in the review mirror here, your overall approach to the accounts payable market, whether you're kind of how satisfied you've been with that acquisition so far? And then going forward from an M and A perspective, whether you think you might want to actually add more assets to bolster that AP portfolio either in terms of size of business or anything else?
Yes, that's a really good question. I know lots of people maybe even on this call for some reason don't love the international payments FX business. Maybe there's some players out there that haven't done as well, but we're delighted. I told the CEO earlier this week coming up on a year that we are so happy we bought his company, their company. It got off to a bit of a slow start because I'm working on really too many things, but they got through that.
They've grown mid teens plus the last couple of quarters are out looking good growth. The sales are way, way up, 25%, 30% up over the prior year. So I'd say at the highest level, we are really happy that we're in the space. Number 2, we're starting to see some synergies from the cross selling to the tune of $4,000,000 or $5,000,000 of new sales we're expecting as we exit this year from our Comdata people selling the Cambridge International Pay people. So that makes me us feel good about the relatedness of the businesses that the Cambridge clients obviously pay domestic AP too, along with international AP.
And so we like the fact that we're in both of those. And then last thing I'd say to you is this whole AP, automating and digitizing AP, we think, I think it's just it is a massive opportunity. And I worked at ADP for almost 10 years and half the expense structure on the planet is people and the other half is vendors. And so building the ADP at AP is a theme we have in the company that we probably will take bigger positions in this space over the coming years. We like it a lot.
Super helpful. Thank you, Ron.
Thank you. Our next question is coming from the line of Peter Christiansen with Citibank. Please proceed with your question.
Thank you. Thanks for fitting me in. Just two quick ones. First, your competitor this morning was shipping well, at least playing with our guidance a little bit as it relates to the Chevron transition. It looks like timing might be pushed off a little bit there.
Can you just remind us how you're factoring that into the outlook?
Yes. Hey, Pete, this is Eric. Yes, we're now thinking we'll probably have that portfolio for the remainder of 2018. So we've kind of built that in. We originally were forecasting to have it kind of mostly through the Q3.
We probably now have it mostly through the Q4. Then we'll transition away from it as we get into next year.
That's helpful. And then the lodging business is doing fantastic. And just any commentary on we're seeing more and more articles on this on the trucker shortage here in the U. S. It seems to not be impacting the lodging business at all.
But any general comments on if you're seeing any improvements there either on the fuel card side or in the lodging side?
Well, on the lodging side, I mean, clearly, we're seeing increases in volume all over the portfolio. As we've said early on, we're focusing more down market, where there are smaller fleets in area where that business has traditionally not sold in. So we've been extremely successful and it's an area that's very underpenetrated in this space. So we've seen a lot of success and we think we're going to continue to see a lot of success. And now adding the digital tool, booking tool, now has added even more incremental rooms to the business as truckers are starting to use that tool a lot to book their new reservations and it's business that we're gaining that we used to kind of lose a little bit of in the past.
So we're very, very bullish on the continued success of that business going forward.
Our next question is coming from the line of Matthew O'Neill with Autonomous Research.
Ron, I was hoping I could follow-up on a comment you made in your prepared remarks around sales channels and working with new partners like merchant acquirers. I was just curious kind of what the opportunity is there? Who and how are you working together? And any other details you could provide on that? Thanks.
Yes, that's a really good question. I think the I'm friends with Jeff Sloan of Global and Frank, so I know both of those guys and their businesses. So I think the new news for us is, call it, over the last 5 or 10 years, those companies have signed up way more kind of service businesses. Think of a plumbing or construction person going out to a house and getting paid with a card now instead of billing. And they're not super important accounts to an acquirer because their volumes are relatively low.
But they could be super important accounts to us because they buy more fuel than they run credit card transactions. So I'd say the opportunity that we're exploring is kind of leveraging their channel and their existing client base that's in the service centric kinds of businesses to take some of our card products. So our products fit some of their customers. And both of those companies are quite used to partner work and kind of working, obviously, for example, with banks and ISOs and buyers and stuff. And so I think it's right in their wheelhouse to maybe work with someone like us.
So that's the idea is to use their relationships and customers and channels and maybe put some of our product line in.
Got it. Thank you very much. And would they think about working the relationship in the opposite direction as well potentially? Or is that premature?
They would. They both are smart guys and they had some reciprocal ideas of some ways that we could help them. I mean on that point, just this idea we talked, I guess, Peter said in the last call about winning and people talk a lot about nameplates and stuff. Just to remind people, we sold 30,000 new business accounts in Q2, 30,000 new businesses joined our portfolio. And so for us, this word winning is not a name of a company.
It'd be a long list for us to name who we're winning, but I want to make sure people leave the call that, in our view, that's winning, selling more new business than you ever have and selling diversified business that you can make a buck on is our idea. So just an FYI.
Thank you. It appears we have no additional questions at this time. And this does conclude today's teleconference. Ladies and gentlemen, we thank you for your participation and you may disconnect your lines at this time.